A few years ago, shares of online marketplace Etsy were among the stock market's pandemic darlings. However, a gradual normalization in demand and the number of active buyers on its platform effectively erased the COVID-driven gains from its share price.
As it stands now, Etsy stock has underperformed the S&P 500 Index ($SPX) by a significant margin over the past year, and didn’t participate in this year’s recovery rally in tech stocks.
Currently, Etsy stock is off about 38% year-to-date, and down 74% from its two-year high. Now that ETSY has given up substantial value, is the stock a good buy near current levels - or is there more downside yet to come? Let's take a closer look.
But first, let’s look at Etsy’s business model and understand how it makes money.
An Overview of ETSY
Etsy operates the leading online marketplace for handmade and artisanal products. The company’s central marketplace, Etsy.com, is a top global destination for unique and creative goods made and sold by independent sellers.
Etsy connects sellers and buyers, enables commerce between the two, and receives fees for its services. The company primarily generates revenue from marketplace activities, including transaction, listing, and payment processing fees. Moreover, it receives fees for providing optional seller services like on-site advertising and shipping labels. Etsy generated 74.5% of its total revenues from marketplace activity in 2022.
Factors Supporting Etsy’s Bull Case
Etsy has millions of items on its platform, including a large assortment of handmade, customized, vintage, and craft products worldwide. Further, a significant portion of its gross merchandise sales, or GMS, comes from custom or made-to-order merchandise.
The unique offerings differentiate Etsy’s platform from others, providing an opportunity to grow organic traffic, build a loyal customer base, and improve profitability. Furthermore, the company is geographically diversified, and generates roughly 45% of its GMS from international markets.
Another key positive is the stabilization in Etsy’s GMS per active buyer. The COVID-19 pandemic significantly increased GMS and active buyers on its platform, driving its GMS per active buyer. However, a broader economic reopening and macro uncertainty has led to a moderation in buyers and GMS, adversely impacting its GMS per active buyer.
During the second-quarter conference call, CEO Josh Silverman highlighted that many of the company’s key metrics are trending positively again. He added, “Our negative year-over-year growth rate improved sequentially, and even more important GMS grew year-over-year in May, June, and July as well.”
Furthermore, the company reactivated nearly 6 million lapsed buyers (buyers who did not make any purchase in a year or more) on its platform in Q2, up 21% year-over-year, and is focusing on bringing in new buyers.
Etsy’s unique platform, stabilization in GMS per active buyer, and improving performance metrics all support the bull case.
Reasons to Remain Cautious
While Etsy focuses on driving frequency, average order value, and GMS per active buyers, macroeconomic factors continue to pressure consumer discretionary spending, which could hurt both GMS and revenue growth rate. During the Q2 conference call, the company warned that the macroeconomic climate remains challenging in the near term, making it tough for sellers to get their share.
Given these headwinds, the average order value is unlikely to improve, at least in the near term. Further, the resumption of student loan payments could pose challenges.
The Final Takeaway: Buy, Sell, or Hold?
The company’s GMS per active buyer on a trailing 12-month basis fell 6% year-over-year to $128 in Q2 (for the Etsy marketplace). However, it remained well above pre-pandemic levels, and has shown early signs of stabilization. Moreover, Etsy's unique offerings, focus on buyer retention rate, and opportunity to reactivate a larger pool of recently lapsed buyers should bode well for growth.
However, external factors - like those macro headwinds and the resumption of student loan payments, which could influence consumer discretionary spending - continue to pose challenges.
Despite the challenging macroeconomic climate, the analysts covering Etsy stock remain optimistic.
Out of the 24 analysts covering Etsy stock, 11 have a “Strong Buy” recommendation, two analysts recommend a “Moderate Buy,” nine maintain a “Hold,” one has a “Strong Sell” rating, and one has a “Moderate Sell.”
Following the recent correction in its share price, the average price target of $113.96 signals expected upside potential of about 53% from current levels.
